Student Loans – A Primer – Part 2

In our last post we told how Jason and his friends knew very little about the student loans they had. Only Jason appeared to be concerned. That changed and now Terrell, Olivia and Kate are worried about their student loans. Except for Olivia, who is a junior, they are all seniors and just months away from graduation

Borrowing money to pay for college is complicated, and so it is easy to make serious mistakes if you don’t look at all the details. In this post we will give you just the most important facts and some advice to pay attention to in making decisions about borrowing money for your postsecondary education. In a later post we will talk about how much to borrow. This is information parents and students all need to know, so let’s get to it.

There are two types of federal loans available to postsecondary students, whether they are in college or in a trade school or other federally recognized postsecondary education. Part of the difficulty in understanding the available loans is the language used in talking about loans and borrowing. This is where greater financial literacy is a big help.

Students can borrow a Direct Subsidized Loan or a Direct Unsubsidized Loan. Why are they called “Direct” and what is the difference between “Subsidized” and “Unsubsidized”? Direct simply means the loan is borrowed directly from the U.S. Department of Education. Once you know that you don’t have to worry about “direct” anymore.

In the context of a student loan, subsidized means that you, the borrower, are being given a loan without having to pay interest until six months after you graduate or leave school before graduation. If you have an unsubsidized loan, it means that interest is charged from the moment you receive the loan all the way through until it is repaid in full.

This leads to another term, accrue. When speaking of loans and the interest we pay on loans, we say the interest accrues, or accumulates, over time until the loan is repaid. So, with a subsidized loan, the federal government is lending you the money without charging you interest until you graduate or leave school before graduation. No interest is accruing. But with an unsubsidized loan, interest begins accruing from the day you receive the loan. For this reason, it’s a good idea to pay this accruing interest as you go through college because it can add up to a significant amount of money.

The current interest rate is a fixed rate of 2.75%. Because it is a fixed interest rate, it won’t change for the life of the loan whether it’s a subsidized or unsubsidized loan. Note: This does not mean that every direct student loan you take out while in college will have a fixed rate of 2.75%. The Education Department can change the rate, up or down, each year, so that the next loan you take out could have a different fixed rate.

Interest rates for direct subsidized and unsubsidized loans for 2019-2020 was 4.53%. Students returning to school for the 2020-2021 school year were happy to learn that the interest rate on their new loan would be 2.75%, a very large decrease when talking about loan interest rates.

At this point, Jason, Terrell, Olivia and Kate felt a little overwhelmed with all this information, and they suspected there was a lot more coming. They were right. But for now, just know that their loans are all different even though they all have direct subsidized and direct unsubsidized loans.

Jason is a fifth year senior, so he has been accruing interest for nearly 5 years on his unsubsidized loans. The total amount a student is permitted to borrow under the direct student loan program is $31,000 and no more than $23,000 can be subsidized. Jason reached his $31,000 limit and has $8,000 in unsubsidized loans. The interest rates on Jason’s loans have changed every year from 2015 to 2020. The interest rate has been as low as 3.76% and as high as 5.05%. Jason also has two private loans totaling $15,000 which his uncle cosigned.

In future posts we will talk about the loans Terrell, Olivia and Kate have, but Jason’s loan status shows how borrowing over several years can be complicated and expensive. Jason didn’t understand this, and now he has to sort out his multiple loans and begin to think how he is going to repay them. He is especially worried about not putting his uncle in a difficult position if he is unable to repay his private loans. If you are a high school junior or senior planning to attend some kind of postsecondary education you will have to pay for, you would be wise to read this over again and begin to look into some of the financial literacy resources listed in earlier posts. Jason has our sympathy, but he’s not alone. Begin now to put yourself in a position where you won’t need our sympathy. If you don’t, four or five years from now sympathy is all we will be able to offer.

Student Loans – A Primer – Part 1

In our last blog we introduced Jason and his friends and told the story of how they had come to their senior year in college and realized they did not know how much money they had borrowed to attend college. They also didn’t know the interest rates or even when they would have to begin repaying the loans. They appeared to lack any understanding of personal finance. Put another way, they were largely financially illiterate. At the end of this blog, you’ll find links to some resources to help you increase your financial literacy. We will have more about financial literacy in future blogs, but now we would like to give you some basic knowledge about student loans.

Federal student loans are complicated, and the language you use to describe them only adds to the difficulty. Student loans consist of two types: direct subsidized loans and direct unsubsidized loans. The amounts the student can borrow under these loans are limited and the fees and interest to be paid are often not understood by the borrower. These loans are from the federal government. Then there are “private loans” which are obtained from banks, credit unions and other private lending companies. The interest rates for federal loans are lower than the interest rates for private loans, and there are also federal programs for loan forgiveness. Yet 7.9% of the outstanding student loan debt is from private loan borrowing.

If federal loans are less expensive and have other benefits, why would you take a private loan? It’s because you need more money than the federal government allows you to borrow. Private lenders offer different loan rates and different loan obligations, requiring the lender to have a better understanding of how loans work.  Private loans also almost always require a cosigner.

Cosigning a loan is serious business, and it’s important for both the borrower and the cosigner to understand the obligations cosigning a loan entails.

A cosigner, typically a parent, guardian or other family member, becomes legally responsible to pay the loan payments if the student loan borrower is unable do so. Typically, the cosigner is trying to help the borrower and does not think about the consequences of cosigning. Even if the borrower always makes the loan payments, the cosigner could be under that obligation for the entire term of the repayment, 10 years or more.

Also, a cosigner’s credit rating could be adversely affected when required to report the cosigned obligation on an application to lease an apartment or on a loan application to, for example, buy a car.

The financially literate borrower understands the obligation he or she is asking a cosigner to take on. Consider this before making the request, and you should inform the possible cosigner of what the obligation entails. In this case, being financially literate could save you an embarrassing circumstance with someone who cares about you should that person be denied a loan because of the cosigner obligation or because you become unable to make the loan payments.


For more information on cosigning a loan, go to https://www.consumer.ftc.gov/articles/0215-co-signing-loan

Improving your financial literacy is something you can do by yourself or, better yet, suggest that it be a family project. Everyone will benefit from it. There are many free resources on line. The resources listed below are ones we believe would be very helpful to consider using.

Next Gen Personal Finance https://nextgenpersonalfinance.org  This is an excellent source of personal finance information and tutorials for students and parents. I suggest you start here.

University of Wisconsin financial Literacy Center https://www.uww.edu/adminaffairs/finance/financial-literacy/financial-resources  This link will take you to basic, helpful information on key financial literacy topics.

Financial Literacy and Education Commission of the United States Treasury Dept. Go to https://www.mymoney.gov/  for links to information for students and teachers.

National Endowment for Financial Education https://www.nefe.org/  NEFE offers two financial education websites, CashCourse ( https://www.cashcourse.org/ ) and Smart About Money ( https://www.smartaboutmoney.org/ ). However, both of these websites will be discontinued effective July 31, 2021. CashCourse is also offered through the Northwestern University Financial Wellness office https://www.northwestern.edu/financial-wellness/money-101/cashcourse.html  and may still be available after July 31.

Also, go directly to CashCourse at https://www.cashcourse.org/  CashCourse® is a free, online financial education resource designed specifically for college and university students offered by the National Endowment for Financial Education. This interactive online money management tool provides answers and resources to help you make smart choices with your money.

Khan Academy https://www.khanacademy.org/  provides a wide array of courses. Scroll to the bottom of the page and click on Life Skills. This takes you to a page on Personal Finance and another page on College Admissions.Investopedia https://www.investopedia.com/terms/p/personalfinance.asp This link will connect you to 10 pages of personal finance information.


Student Loans — Don’t Be Like Jason and His Friends

Jason and a couple of friends were sitting around one evening in the fall of their senior year in college when one them said something about his student loan. That led to them all talking about their loans and they realized that none of them knew exactly how much they owed or what the interest rate was or when they would have to start repaying the loan.

They had all laughed off the student loan talk, but later that evening the talk haunted Jason, and he began to worry. Why didn’t he know how much he had borrowed? Why didn’t he know the interest rate or when he would have to begin repaying the loan?

There’s a reason Jason and his friends didn’t have answers that night. They were all lacking in financial literacy. Simply put, to be literate in something is to be knowledgeable and competent in the subject. Here, the subject is finance, that is, money, credit cards, loans, etc. Jason and his friends were simply not knowledgeable about money.

Financial literacy is probably the most important subject that isn’t taught to high school students. Students are taught to be literate, that is competent, in algebra and French and science, but most students won’t need to be competent in these subjects in order to make important decisions in their lives. This is not the case with financial literacy. Whether you are rich or poor or somewhere in between, you will have to make money decisions throughout your life. Starting in your senior year of high school, you will have to decide what you’re going to do after high school and how you’re going to pay for it.

Unfortunately, too many students are like Jason and his friends – clueless about money matters. And often parents are not informed enough themselves to provide the guidance they need.

A 2017 study by Inceptia, “Loan Summaries: Nudging Students Towards Smart Borrowing,” found that 94% of the students surveyed do not understand their loan repayment terms and 65% reported that the loan process was confusing.

Moreover, the American Institute of Certified Public Accountants found while nearly all college students they surveyed ranked personal financial management as a skill that was extremely important only 23% of those surveyed actively sought out information to improve their financial habits.

Parents, too, wanting to help their children, often assume debt they cannot afford. CNBC reports, “According to Experian borrowers age 35 to 49 increased their direct loan debt by $45.9 billion last year. Much of this new debt is reportedly from 800,000 parents who borrowed Parent PLUS loans to help send their kids to college.”

Since most students going to college or some other postsecondary education will have to borrow money to pay for it, they need to start looking for answers to questions such as these:

  • How much money should you borrow?
  • Should you save money before borrowing?
  • Should the cost of postsecondary education be part of deciding where to go for college or career training?
  • What are the extra and sometimes unexpected costs of everyday living?

The federal formula that determines the “cost of attending” does not include costs like clothing, transportation, entertainment, unexpected costs like a car repair, etc.

Students who have a reasonable amount of financial literacy, and their parents, will recognize these and other important considerations early in the planning for postsecondary education. They would also consider a host of other matters which we will discuss in our next post.

Financial Literacy – Don’t leave home without it!

Verbal literacy and math literacy are common enough terms when talking about education. But financial literacy is a term you’re likely much less familiar with. That is not your fault. After all, it is not taught in most schools across the country and, when it is, it is more often than not just one unit in a larger course.

The Council for Economic Education’s 2020 Survey of the States recently issued its biennial report and noted that while more teaching of personal finance was being done, only 21 states require high school students to take a course in personal finance.

Forty-five states require that personal finance be “Included in the K-12 Standards,” but only 37 states require the standards to be implemented by their school districts. Pennsylvania requires study of personal finance to be included in K-12 standards and requires the standards to be implemented in school districts but does not require school districts to offer a high school course in personal finance and does not require personal finance study to be integrated into another course. Nor does Pennsylvania require any standardized testing of personal finance knowledge.

If that sounds confusing, you are not alone. My inference is that the idea of educating students in personal finance is applauded but that putting the idea into action is too much trouble. In the end, students are the losers.

And why are students the losers? Simply because before they even graduate from high school, whether they plan on attending college or pursuing some alternative, students will be confronted by important and consequential personal finance decisions. And so will their parents. The fact is that too many have insufficient knowledge to make these types of choices.

Annually, TIAA Institute in conjunction with George Washington University conducts a study to assess financial literacy among U.S. adults. Its 2020 report found that many Americans lack the necessary personal finance knowledge to make sound financial decisions, with just 52% of the US adults surveyed answering the Personal Finance Index questions correctly.

For students who are just three or four years away from high school graduation, financial literacy will soon be a necessity which they are likely unprepared for. Whether going to college or entering the workforce, students will have to make financial choices about which colleges to apply to or which training schools, boot camps or apprenticeship programs to apply to. With this comes the question of how to pay for your choice. Of course, their parents have been thinking about (dreading?) this as well.

Ask any parent what the most confusing and difficult part of the college application process is and they will tell you it is financial aid. It begins with filling out the FAFSA, continues through trying to understand the financial aid package colleges are offering their child and, finally, deciding which is the best offer.

The 2020 Survey of the States notes that research shows that personal finance education encourages more prudent financial behaviors and points to research by Montana State University professors Carly Urban, Ph.D. and Christiana Stoddard, Ph.D. Their research compared incoming freshman at four-year institutions from states with personal finance graduation requirements to students in states without a mandate.

Dr. Stoddard said, “We found that in states with mandated finance graduation requirements for high school, more college students make better borrowing decisions, including applying for and receiving federal aid and grants, while simultaneously decreasing credit card balances.”

The evidence is clear. Each of us, students and parents, should take steps to become more knowledgeable about personal finance. There are very good resources available online for free. Good sources of information include:

MoneySmarts  https://moneysmarts.iu.edu/index.html  is a website of the University of Indiana Office of Financial Literacy providing a wealth of information and practical personal finance

LemonadeDay.org https://lemonadeday.org is a website that focuses on entrepreneurship and teaching financial literacy as part of the process

Khan Academy https://www.khanacademy.org/  provides a wide array of courses, including offerings on personal finance focused on Gen Z and courses on paying for college

Financial Literacy and Education Commission of the United States Treasury Dept. Go to https://www.mymoney.gov/  for links to information for students and teachers.

These and other websites you can find will enable you to increase your personal financial literacy and may even motivate you to lobby for a course in financial literacy in your school district.

With colleges at risk of closure, applicants should ask these 5 questions

I recently took part in online presentation by the editors of Inside Higher Education, a prominent journal reporting on all things in higher education. The purpose of the presentation was to advise college representatives how to make college affordable. There were no clear answers.

While tuition rates at public four-year colleges and private colleges have had the lowest percentage increase in 30 years and the average sticker price for community colleges has been frozen in 14 states and many local districts, the fact remains that this is not what parents and students believe to be the case. Their perception is based primarily on reporting in the media that focuses on the extreme cases of graduates carrying $75,000-$100,000 of student loan debt while being unable to find a good paying job. In fact, the average student loan debt is $32,731 (as of the third quarter 2019, Federal Reserve & New York Federal Reserve).

Compounding the public’s perceived extravagances of colleges is the fact that virtually every college in the country is experiencing significant to severe budgetary shortfalls. While the pandemic has certainly been extremely costly to the colleges, one of the editors emphasized, “Most of the issues in higher ed predated COVID-19 and will outlive COVID-19.” He is correct in this because COVID-19 has only made visible the elephant in the room that is the failure of higher education to address serious fiscal issues many years ago.

Why is this important to parents and students planning to attend college or who are already there? As with any problem that is allowed to become more serious over time, the moment when it can no longer be ignored is inevitably painful. In June, Fox Business News reported that a spokesperson for the American Council on Education, the main higher education lobbying group in the United States, told World University Rankings that losses across higher education of $50 billion are probable because of the pandemic.

The Chronicle of Higher Education reports that four-year private nonprofit colleges rely on tuition and fees for about 30 percent of their revenue at a time when freshman enrollment has dropped more than 16 percent from last year and a month into the fall semester, undergraduate enrollment overall was running 4 percent below last year’s levels, according to the New York Times.

Nor is the outlook bright as Moody’s Investors Service just released a report on the fiscal health of colleges and universities and forecast that approximately 75% of private colleges and 60% of public colleges expect net tuition revenue to decline in fiscal year 2021.

The result is that colleges must find ways to reduce costs while at the same time incurring great costs due to the pandemic. This will inevitably impact teaching and services at thousands of colleges across the country. The wealthiest colleges, which typically are also the most selective, will experience the least stress. But state colleges and universities will face serious budget cuts. The Institute for College Access & Success has said that according to the Center on Budget and Policy Priorities, “State budget shortfalls may total about $650 billion over the next several years.”

Small private colleges that don’t have significant financial reserves will be at greatest risk of either closure or merger with a financially stronger college. Edmit, a college advisory company, predicted earlier this year that at least 345 private nonprofit colleges could close or merge within six years.

Therefore, the questions you should be asking as you consider colleges to apply to (or return to) include:

  • Is a program/major you are considering likely to be closed before you graduate?
  • Are the sizes of classes likely to increase?
  • Have there been reductions in faculty and staff? Are any anticipated?
  • Has enrollment at the college been stable or increasing in recent years? What was the decline in enrollment entering this academic year?
  • In subsequent years, will financial aid that does not include loans be comparable to my first financial aid package?

Unfortunately, colleges probably will be unable to provide definitive answers to any of these questions. Nevertheless, ask the questions. Regardless of the kind of answers you get, these are the kinds of issues to pay attention to when considering any college.

Important! Talk to your school counselor. They miss you.

This afternoon I participated in a lengthy conference call with some 35 school counselors and financial aid advisors, and was I ever surprised. These counselors from all across Pennsylvania told the same story: they have not heard from their students and parents nearly as much as they believe is necessary to complete college applications and to properly fill out FAFSA forms. (The FAFSA is the Free Application For Federal Student Aid form required to be eligible for any college financial aid.) Your school counselor wants to help.

It seems that one of the effects of remote/hybrid learning that we have all been experiencing is that students and parents have not been reaching out for the assistance that is available to them. Perhaps the stresses of the pandemic, working from home and, perhaps, lost income have made everyone want to simply avoid these tasks. And certainly applying to college and applying for financial aid are difficult tasks in even the best of times.

A primary concern the counselors expressed is that as deadlines to submit college applications and financial aid requests come closer, students and parents will hurry to get the forms completed and, in the process, will not complete them properly. A hurried application to college could result in a denial instead of an acceptance, and a FAFSA form that contains errors or is incomplete might be returned for corrections. Lost time in submitting the FAFSA form risks losing the financial aid needed to attend a college.

Applications to college are down across the country for a variety of reasons, all related to the pandemic, and how this will impact college admissions and financial aid offers is unknown. For parents and students who have questions about whether they should apply to college this year and questions about other alternatives, it is imperative that you contact your school counselor to help you think through these questions and make a plan to proceed.

Perhaps the right answer for you is to begin college locally at a community college. But that raises questions of transferring credit to a four-year college. It’s a complicated question your school counselor can help you with. Perhaps the right answer for you is to postpone attending college for a year. If so, you’ll need counseling to figure out how best to spend the year. Remember, if you plan to start college one year after high school graduation, you’ll be filling out applications and FAFSA forms just 3 to 4 months later. You’ll want to use that time well, both for yourself and for the story you will tell in your college application.

Breaking – College Board Cancels At-Home SAT Testing

The Washington Post reported early this afternoon that the College Board would not conduct at-home SAT tests this summer and fall.

The College Board explained that it was concerned that many students would not have reliable internet service for a three hour test. In fact, the recent College Board’s Advanced Placement examinations done at home met with many problems when students were unable to submit their work due to computer problems. A great deal of criticism followed.

The Washington Post quoted David Coleman, Chief Executive of the College Board, as acknowledging, “We know demand is very high and the registration process for students and families under this kind of pressure is extremely stressful.” He continued, “There are more important things than tests right now. … We therefore are asking our member colleges to be flexible toward students who can’t submit scores, who submit them later, or who did not have a chance to test more than once.”

When adequate technology to conduct at-home testing will be available is speculative. Students should plan on taking their SAT tests in person at their schools or other testing center.

The ACT has said it is planning at-home testing “if necessary,” but it is unlikely at-home testing will be possible.

Good News! Loan Rates Reduced

At a time when we can all use some good news, here’s some.

NASFAA (Nat’l. Assoc. of Student Financial Aid Advisors) advised yesterday afternoon that interest rates for federal loans disbursed on or after July 1, 2020 will drop sharply. The rate for undergraduate Direct Loans will drop to 2.75% and the rate for parent/graduate PLUS loans will drop to 5.30%. The interest rate for graduate/professional Direct Unsubsidized Loans will drop to 4.30%.

May 1 Decision Day — Not!

May 1 date for blog

May1 has traditionally been the deadline for students to tell colleges where they plan to attend college in the fall. This year, however, that deadline should be considered flexible. More than that, students and their families should be advising the colleges they wish to attend that they will be postponing their decision until they know more about whether the college will open for the fall semester, whether courses will be taught in person or online and whether there will be dormitory facilities available. (There are lots of other questions, but these will do to start.)

Survey after survey has revealed that many students are very reluctant to commit without knowing what the college will be able to provide in the fall. You should be too.

A poll conducted in March by the marketing and research firm SimpsonScarborough revealed dramatic findings for high school seniors who were planning to attend college before the Covid-19 pandemic hit. Twenty percent of those surveyed believed that because of Covid-19 it is likely or highly likely they will not attend a four-year college in the fall, but will, instead, attend a community college, take courses online or not attend college.

Even students who have already paid deposits are rethinking their decision. A survey of 1,171 American high school seniors released today reveal that 12% of students who paid a deposit changed their minds and no longer plan to attend a four-year college full time. Art & Science Group, which did this survey, also reported in a press release that “for all but 400 institutions that have extended their deadline to June 1, over four-fifths of non-depositors have expressed doubts about their ability to attend their first-choice school.”

While it is difficult to contact colleges by phone because they are closed, families should be contacting the colleges the student wishes to attend in order to get clarification about these and other matters. That said, the fact is that nearly all colleges are still trying to decide what they will be able to provide when college reopens. In these circumstances, the traditional May 1 deadline cannot be what it used to be, nor should it.

Today’s SATs Delayed 3 Hours in Hong Kong

Today’s SATs were delayed about three hours in Hong Kong because the subway system had been shut down by the authorities in response to protests by thousands of citizens opposing the heavy hand of China in Hong Kong.  Hong Kong is 12 hours ahead of eastern daylight time.

The Wall Street Journal reported, “Thousands of students from Hong Kong and mainland China take the test each year in a cavernous exposition center near the airport.” Imagine the stresses on these kids as they went in to take their SATs.

If you haven’t been following the protests in Hong Kong, you should be. Why? Because of their effect on China. The protests take place on the weekend and are now in the 18th weekend. They began in opposition to a China-sponsored bill that would have allowed people to be sent for trial in mainland China’s opaque justice system. Additional civil rights demands have been added as the number of protestors has grown to tens of thousands.